2Q26 results: Continue to step up AI investment to drive long-term growth
2Q26 results:Continue to step up AIinvestment to drivelong-term growth Target PriceUS$830.00(Previous TPUS$880.00)Up/Downside54.0%Current PriceUS$539.03 Metaannounced 2Q26 results:total revenue increased by 28%YoY toUS$60.8bn,largely in line with Visible Alpha(VA)consensus estimate;operating income declined by 8% YoY to US$18.8bn, or grew by 4% YoY toUS$21.2bn if excluding US$2.4bnof legal charges, vs. VA consensus ofUS$21.5bn. For 3Q26E,managementguidedtotal revenue to grow by 19%-25% YoY to US$61-64bn, also in line with the consensus (US$63.1bn). In viewof the massive AIopportunitieson both consumer and enterprise front, thecompany remains committed tomaximizingAI computecapacityin FY26/27E,which may lead to short-term earnings and cash flow pressure. That said, weexpect the new AIopportunities(e.g. enterprise agent, API services and AIcompute rental) tograduallymake earnings contributions, and raise our FY27-28 operating income forecast by 0-4%. We trim our target price to US$830.0based on 28x FY26 PE (previous: US$880.0 on 29x FY26 PE) given short-termearnings and cash flow uncertainty. Maintain BUY, with next key catalysts onfoundational model upgrade and acceleration in enterprise AImonetization. USInternet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk Solid core businessgrowth.Family of Apps (FoA) ad revenue grew by27% YoY to US$59.4bn in 2Q26 (1Q26/4Q25: +33%/24% YoY), with adimpression/pricingup by 14%/12%YoY respectively.AI continues toimprovead monetization efficiency:1)The company launched MetaGenerative Recommenderin 2Q26, thefirst generative model in its adsystem, which canreason about ad content and user preferencesto predictthe best ad for users. Early pilots using the model drove a1% increase inapp event conversions; 2)Combiningcontent understandingcapabilityofLLMs and the ads ranking model GEM, Metaachievedan8% increase inad clicks and a 16% uplift in conversions on Facebook; 3)Advantage+, AI-powered end-to-end ad solutions,sawARR surpassing US$75bn and over9mn small businesses adopting at least 1 AI creative tools.FoA otherrevenueroseby73% YoY to US$1.0bnin2Q26,driven by the growth ofWhatsApp paid messaging and subscriptionsrevenue. ShuyinGUO(852) 3916 3716guoshuyin@cmbi.com.hk Stock Data Exploringnew AI opportunities.The company accelerated AImonetization on the enterprise front: 1)enterpriseagent: MetaintroducedMeta Business Agents globally on WhatsApp and Messenger, with over1mnbusinesses using these agents each week to communicate withcustomers and completesales; 2) APIs: Meta recently launched model APIandcooperatedwith distribution channels like OpenRouter to acceleratedevelopers’adoption;3)compute rental:the company is exploringopportunitiesof direct compute rental, thoughmanagementalso notedthatasubstantial amount ofitscomputewill still be utilized formodeltraining. Maximizingcompute capacity.Capex grew by 83% YoY to US$31.1bn in2Q26,dragging free cash flow down by 91%YoY to US$784mn.Managementraised the lower-end of FY26E capex guidance from US$125-145bn to US$130-145bn (+80-101% YoY),and will continue tomaximizeAIcompute capacity in FY26/27Egiven strong demand across business lines. Source: FactSet Business forecasts update and valuation Valuation We value Meta at US$830.0per share based on28x 2026E P/E. Our target PE multiple isa premium totheglobal adssector average (16x), reflecting Meta’s strong leadership inglobal social media space and capability todrive long-term earnings growth. Average Risks AIinvestment impacts short-term earnings and cash flow;slower-than-expected AImonetization;slowdown in ad revenue growth amid macrouncertainty. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered in thisreport: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered inthis research report within 30 calendar days prior to the date of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any of theHongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies coveredin this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock withpotential